ICAEW chart of the week: Silicon Valley Bank

My chart this week examines the late lamented Silicon Valley Bank and how its outsized investment in securities made it particularly vulnerable to a bank run.

Chart showing the consolidated balance sheet of SVB Financial Group (Silicon Valley Bank) at 31 Dec 2022.

Assets $212bn = Securities at amortised cost $91bn + securities at fair value $26bn + loans $74bn + cash $13bn + other $8bn.

Side column shows securities at fair value $102bn + underwater $15bn.

Liabilities $196bn = deposits $173bn + short-term debt $14bn + other $9bn.

Equity $16bn.

Silicon Valley Bank collapsed on 10 March 2023 after a bank run saw depositors rapidly withdraw funds as they lost confidence in the bank’s ability to survive. The bank’s collapse followed concerns that had been growing since 24 February 2023, when Silicon Valley Bank’s parent company, SVB Financial Group, published its annual consolidated financial statements for the year ended 31 December 2022.

As illustrated by this week’s chart, SVB’s consolidated balance sheet at 31 December 2022 comprised assets of $212bn, liabilities of $196bn and equity of $16bn. 

Assets consisted of investment securities recorded at amortised cost of $91bn, investment securities recorded at fair value of $26bn, loans of $74bn, cash of $13m, and other assets of $8bn. Liabilities comprised customer deposits of $173bn, short-term debt of $14bn, and other liabilities of $9bn (including long-term debt of $5bn). 

Not shown in the chart is the breakdown of equity of $16bn, which at 31 December 2022 primarily comprised preference stock of $4bn, additional paid-in capital of $5bn and $9bn of retained earnings, less $2bn in negative accumulated other comprehensive income.

As disclosed on the face of the balance sheet, the fair value of SVB’s $91bn portfolio of held-to-maturity investment securities was $15bn below its carrying value at amortised cost, reflecting how the main fixed-asset securities in this category – predominantly federally guaranteed mortgage-backed securities and collateralised-mortgage obligations – had fallen in value as interest rates climbed over the course of 2022. These unrealised losses of $15bn were not that far off the $16bn of equity reported by SVB, suggesting the bank would struggle if it ever had to sell these investments before they matured.

SVB’s intention had been to hold onto these investments, but circumstances changed on 9 March when depositors – concerned about further falls in the value of SVB’s assets as interest rates continued to rise during 2023, and an adverse reaction to a belated capital raising exercise launched by SVB on 8 March – withdrew $42bn in one day. This forced SVB to rapidly liquidate assets and borrow to find the cash required to repay depositors, but by then the first major digital bank run had gained too much momentum, with depositors attempting to withdraw a further $100bn on Friday 10 March. With insufficient cash to repay the amounts requested by SVB’s customers, the bank was closed by regulators that lunchtime.

A similar situation played out in the UK, where £3bn out of £10bn of deposits in SVB’s local subsidiary were withdrawn on Friday 10 March, causing the Bank of England to step in over the weekend to enforce a sale to HSBC for £1, a significant discount to previously reported equity of £1.4bn.

While banking regulators in the US, the UK and elsewhere will pour over the entrails of Silicon Valley Bank (and other recent bank failures such as Signature Bank of New York and Switzerland’s Credit Suisse) for some time to come, most commentators consider SVB to be unusual in how it had (or rather hadn’t) managed its exposure to changes in interest rates. At a minimum, closer regulatory supervision appears a likely consequence.

However, perhaps the biggest legacy of the failure of SVB is the decision of US regulators to protect the full amount of customer deposits and not just those covered by the $250,000 federal deposit insurance cap. For depositors in this mid-size banking institution that is of course good news, but the concern is that this might set a precedent for how to deal with potential bank failures in the future, where the price tag could be very much larger.

This chart was originally published by ICAEW.

ICAEW chart of the week: Public sector employment

My chart takes a look at how employment in the public sector has grown from 5.3m to 5.8m over the past five years.

Column chart in two sections showing FTEs in Dec 2017 and Dec 2022 and then headcount in Dec 2017 and Dec 2022.

Health and social care: FTEs 1,602,000 -- 1,864,000; headcount 1,870,000 -- 2,134,000.

Education: 1,099,000 -- 1,119,000; 1,494,000 -- 1,498,000.

Public administration: 859,000 -- 996,000; 1,018,000 -- 1,154,000.

Police and armed forces: 391,000 -- 421,000; 404,000 -- 431,000.

Other: 479,000 -- 511,000; 558,000 - 584,000.

Total: FTEs 4,430,000 -- 4,911,000; headcount 5,344,000 -- 5,801,000.

The size of the public sector workforce has grown significantly over the last five years between December 2017 and December 2022, with the number of full-time-equivalent employees (FTEs) increasing by 11% from 4,430,000 to 4,911,000 and headcount rising by 9% from 5,344,000 to 5,801,000.

This compares with a population increase of 2% over that time, but a 7% increase in those aged 65 or more (from 12.1m to 12.9m), which adds significantly to the demands placed on the National Health Service.

Our chart highlights how the number of FTEs working in health and social care increased by 16% from 1,602,000 to 1,864,000 between 2017 and 2022, while headcount went up by 14% from 1,870,000 to 2,134,000. This principally relates to the National Health Service, which saw FTEs go up 19% from 1,430,000 to 1,700,000 and headcount go up 17% from 1,640,000 to 1,916,000. Other health and social work staff fell slightly with FTEs down from 172,000 to 164,000 and headcount from 230,000 to 216,000. The latter excludes most social care staff, which are principally employed in the private sector.

The next biggest category is education, which saw FTEs increase by 2% from 1,099,000 to 1,119,000 at the same time as headcount was broadly flat, going from 1,494,000 to 1,498,000, implying more hours being worked by school staff and other state employees in the education sector. This represents an increase in efficiency given that pupil numbers have increased by around 4% over the same period.

Public administration FTEs increased by 16% from 859,000 to 996,000 and headcount by 13% from 1,018,000 to 1,154,000. This category includes the civil service (FTEs up 22% from 396,000 to 483,000 and headcount up 21% from 427,000 to 515,000) in addition to local authority and other office staff across the wider public sector. Much of this increase in public administration has been driven by Brexit, which has required more staff to perform duties previously outsourced to the EU as well as to administer more bureaucracy in the nation’s trading arrangements, although other factors such as pandemic have also had an impact.

Police and armed forces FTEs increased by 8% from 391,000 to 421,000 and headcount by 7% from 404,000 to 431,000. This can be analysed between the armed forces where FTEs were broadly the same at around 155,000 for both FTEs and headcount in both 2017 and 2022, and the police, including civilians, where both FTEs and headcount increased by around 12% (FTEs from 236,000 to 265,000 and headcount from 246,000 to 276,000). The latter principally reflects the government’s decision to reverse cuts in police numbers implemented in the early 2010s.

Other staff in the public sector have also increased over the last five years, with FTEs up 7% from 479,000 to 511,000 and headcount up 5% from 5,344,000 to 5,801,000.

Overall, the public sector in the UK has seen both employment headcount and hours worked per employee grow over the last five years as demands on public services have increased significantly. This is partly down to an ageing society, which puts pressure on the NHS, combined with the consequences of the pandemic, which exacerbated backlogs throughout the system. It is also a consequence of Brexit, which has added significantly to administrative and policy burdens placed on the civil service in particular.

These significant increases in FTEs and headcount perhaps explain the government’s moves to cut public sector pay in real-terms over the last few years. It remains to be seen if that Canute-like policy will be sufficient to hold back the tide of higher payroll costs that have been and are continuing to roll in to the shores of the public finances.

This chart was originally published by ICAEW.

ICAEW chart of the week: Spring Budget 2023

My chart this week is on the Chancellor’s tax and spending plans for the coming financial year commencing on 1 April 2023.

Column chart showing the final fiscal estimate for 2022/23 and the Budget estimate for 2023/24.

Final estimate 2022/23
Deficit £152bn.
Receipts £1,020bn =  Taxes £922bn + other receipts £98bn. 
Spending £1,172bn = expenditure £968bn + energy support £30bn + interest £115bn + net investment £59bn.

Budget estimate 2023/24
Deficit £132bn.
Receipts £1,057bn =  Taxes £950bn + other receipts £107bn. 
Spending £1,189bn = expenditure £1,015bn + energy support £5bn + interest £95bn + net investment £74bn.

Chancellor Jeremy Hunt presented his first Budget to Parliament on Wednesday 15 March 2023, setting out his formal Budget estimate for the financial year ended 31 March 2024 (2023/24) accompanied by fiscal forecasts from the Office for Budget Responsibility (OBR) for the period up to 2027/28 and the OBR’s final estimate for the current financial year ending on 31 March 2023.

Our chart this week starts by summarising the final estimate for 2022/23, highlighting an expected shortfall of £152bn between anticipated receipts of £1,020bn and spending of £1,172bn. This is followed by a similar analysis for the budget year of 2023/24, with a deficit of £132bn resulting from a shortfall between estimated taxes and other receipts of £1,057bn and spending of £1,189bn.

Receipts in 2022/23 and 2023/34 respectively comprise £922bn and £950bn in tax and £98bn and £107bn in other receipts. The increase in tax of 3.0% is perhaps lower than might be expected given the level of inflation and the new higher rate of corporation tax from 1 April 2023, with an anticipated 10% growth in corporation tax receipts (net of full expensing of business investment) offset by flat or relatively small growth in other taxes. Other receipts are expected to increase by 9%, primarily the effect of higher interest rates on investments.

Total managed expenditure in 2022/23 and 2023/24 respectively comprise £968bn and £1,015bn in current expenditure excluding energy support costs and debt interest, £30bn and £5bn in energy support packages, £115bn and £95bn in debt interest, and £59bn and £74bn in net investment.

Current expenditure excluding energy support costs and debt interest is expected to increase by 4.9% in 2023/24 compared with 2022/23, more than the 2.5% ‘whole economy’ measure of inflation used by the government and the 4.1% forecast for consumer price inflation. This partly relates to inflation in the current financial year feeding through into next year’s budgets, as well as spending measures announced by the Chancellor.

The three-month extension of the energy price guarantee is anticipated to cost £3bn in 2023/24, with other energy support measures adding a further £2bn to the forecast.

Debt interest is expected to fall by 17% to £95bn, principally because of the effect of a much lower rate of inflation on index-linked debt more than offsetting higher interest rates overall.

Public sector net investment comprises gross investment of £116bn and £134bn in the two years respectively, net of depreciation of £57bn and £60bn respectively. The increase in gross investment is flattered by a £8bn one-off credit in the current financial year arising from changes to student loans, which if excluded implies an 8% increase in capital expenditure and other public investment overall. This reflects delays in capital programmes that are expected to come in significantly under budget in the current financial year but cost more in the next, relatively high construction price inflation, and an extra £2bn of capital investment allocated to defence.

The final estimate for the deficit in the current financial year of £152bn is £25bn lower than was expected in the OBR’s November 2022 forecast of £177bn, while the Budget estimate for 2023/24 of £132bn is £8bn lower than the £140bn forecast last time. The reduction in 2022/23 reflects the benefit of a slightly improved economic outlook, with policy decisions for the last couple of weeks of the financial year by the Chancellor netting off to close to nil. This contrasts with 2023/24, where forecast upsides amounting to around £27bn have been mostly offset by a net cost of £19bn from tax and spending decisions.

Overall, the chart highlights just how much money the UK raises in tax and incurs in public spending. Tax and other receipts are expected to approach £1.1trn in the coming financial year, while public spending is anticipated to be just under £1.2trn. 

On a per capita basis in 2023/24 this is equivalent to receipts and spending of approximately £1,290 per month and £1,450 per month for each person in the UK respectively, a shortfall of £160 per person per month that needs to be funded by borrowing.

The challenge for the Chancellor is that with the number of pensioners projected to increase by 9% over the next five years (with consequent implications for spending on pensions, welfare, health and social care), there is not much room to invest in public services or in infrastructure at the same time as also reducing taxes as he would very much like to do. 

The Chancellor wasn’t able to square this circle in the Spring Budget 2023, so watch this space to see whether he can be any more successful in future fiscal events.

This chart was originally published by ICAEW.

ICAEW chart of the week: Fluctuating fiscal forecasts

Ahead of the Spring Budget on 15 March, I take a look at how the official forecast for the 2022/23 fiscal deficit has fluctuated through successive forecasts.

Column chart showing the forecast fiscal deficit for the financial year 2022/23 over successive forecasts.

First four columns (*) have £21bn added to them for methodology changes.

Nov 2017 £26bn *
Mar 2018 £21bn *
Oct 2018 £21bn *
Mar 2019 £14bn *
Mar 2020 £61bn
Nov 2020 £105bn
Mar 2021 £107bn
Oct 2021 £83bn - Budget estimate
Mar 2022 £99bn - revised estimate
Nov 2022 £177bn - revised estimate
Mar 2023 TBC

My chart this week is on the topic of fiscal forecasting, and how the forecast deficit for the UK government’s financial year ending 31 March 2023 (2022/23) has changed over the course of five or so years of official forecasts. 

Our story starts with the Autumn Budget in November 2017, when the Office for Budget Responsibility (OBR) first published a medium-term fiscal forecast that extended to 2022/23. After plugging economic assumptions into its model and combining it with the government’s plans for public spending, it came up with a forecast of £26bn for the 2022/23 fiscal deficit, the shortfall between receipts and public spending calculated in accordance with statistical rules.

Then Chancellor Philip Hammond was at that time pretty positive about the economic prospects for the UK, despite weak productivity causing him to abandon the government’s medium-term plan to completely eliminate the budget deficit. Instead, he settled for a more modest objective of a balanced current budget and a falling debt-to-GDP ratio, extending austerity policies to cut public spending.

The next few fiscal events saw the OBR revise down its forecast for the 2022/23 deficit in the light of moderately better economic data each time. This saw the forecast for the 2022/23 deficit reduce to £21bn in the March 2018 forecast, stay at £21bn in October 2018 and fall to £14bn in the March 2019 forecast. 

The forecasts up to this point were before methodology changes announced in 2019 relating to the treatment of student loans and other items. According to the OBR these had the effect of increasing the forecast for the fiscal deficit in 2022/23 by an estimated £21bn.

The calling of a general election in December 2019 prevented Chancellor Sajid Javid from presenting a Budget in November 2019, so the OBR had to wait until March 2020 to publish its next forecast. At this point, 2022/23 was in the middle of the forecast period and Rishi Sunak’s first fiscal event as Chancellor saw a £26bn increase in the 2022/23 deficit to £61bn in an ‘end-to-austerity’ Budget that saw £46bn in extra planned spending compared with previous forecasts.

Frustratingly for the OBR, its forecasts that day were immediately out of date, as initial emergency pandemic measures were decided too late to be incorporated into its calculations. While these and subsequent temporary measures to support households and businesses through the pandemic primarily affected the 2020/21 and 2021/22 financial years, the economic hit caused by COVID-19 was the primary reason for the OBR increasing its forecast for the 2022/23 fiscal deficit to £105bn in November 2020.

March 2021 saw a small tweak to the forecast to £107bn, but the Autumn Budget and Spending Review in November 2021 saw an improvement to £83bn as the economy emerged from the lockdown phases of the pandemic in a slightly better place than was previously anticipated, with higher spending funded by planned tax rises.

This positive move went into reverse in March 2022 as the OBR revised its Budget estimate upwards to £99bn, reflecting rising interest rates on government debt and the government’s initial response to an emerging cost-of-living crisis. 

The OBR was not asked to produce an official forecast to accompany short-lived Chancellor Kwasi Kwarteng’s tax-cutting ‘mini-Budget’ in September. At £177bn the OBR forecast for the 2022/23 fiscal deficit in November 2022 was eye-watering enough, and that was after current Chancellor Jeremy Hunt’s Budget had reversed most of his predecessor’s tax cuts.

Lower than anticipated wholesale energy prices have led several commentators to suggest that the OBR’s final estimate for the fiscal deficit could be revised down by £30bn or more when it presents its medium-term forecasts up to 2027/28 to accompany the Spring Budget on 15 March 2023. As the chart suggests, this is not a ‘windfall’ as some commentators have claimed. Even if the gap between receipts and spending narrows, the deficit will still be significantly higher than the £83bn official estimate included in the Budget for 2022/23 presented to Parliament.

Fiscal forecasting is of course a very difficult task even in normal times. The deficit is the difference between two very large numbers – receipts of just over a trillion pounds and public spending of nearly £1.2trn – that can each move up or down significantly as economic conditions change, and policy choices are made. Add to that a global pandemic, a cost-of-living crisis and an uncertain policy outlook, and it is perhaps unsurprising that the forecasts have changed so much over the past five years. 

In an uncertain world, fiscal forecasts fluctuate.

This chart was originally published by ICAEW.

ICAEW chart of the week: Government bond yields

My chart this week looks at what a difference one year has made to the cost at which governments around the world can borrow.

Column chart showing 10-year yields on government debt as at 2 Mar 2022 and 2 Mar 2023.

Japan: 0.13%, 0.50%
Germany: 0.02%, 2.71%
France: 0.47%, 3.19%
Canada: 1.81%, 3.40%
UK: 1.26%, 3.84%
USA: 1.87%, 4.02%
Italy: 1.55%, 4.56%

Source: Bloomberg, 'Rates & Bonds 2023-03-02 11:33'.

The past year has seen a dramatic change in economic fundamentals around the world as inflation has surged and growth has stuttered. One of the most dramatic changes has been to the cost of new government borrowing, with the yields payable by governments to sovereign debt investors increasing significantly from where they were a year ago.

As our chart of the week illustrates, Japan has seen yields on 10-year government bonds increase from 0.13% on 2 Mar 2023 to 0.50% on 2 Mar 2023, a far cry from the negative yields it has obtained over much of the last decade when (in effect) investors were paying the government of Japan for the privilege of lending it money. The change for Germany has been even more marked, from a position a year ago where it could borrow over 10 years for almost nothing (0.02%) to today where if it wanted to raise new funds it would pay an interest rate of 2.71% over 10 years. 

The other members of the G7 have also seen the effective interest rate payable on 10-year government bonds rise, with France going from 0.47% a year ago to 3.19% today, Canada from 1.81% to 3.40%, the UK from 1.26% to 3.84%, the USA from 1.87% to 4.02%, and Italy from 1.55% to 4.56%.

Yields from 10-year government bonds are seen as a benchmark rate for most countries, as although governments can and do borrow for much longer periods – with market data often available for 20-year and 30-year bonds as well – most countries have average maturities of much shorter periods. The UK is an outlier in this respect with an average debt maturity on government securities of just over 15 years (before taking account of quantitative easing), in contrast with the more typical average maturity of seven years for Italian government debt.

Although the amount payable on new debt has risen significantly, this should in theory feed in to overall cost of government borrowing gradually as it will take time for existing government bonds to mature and be refinanced. For some time to come the overall cost of borrowing will continue to benefit from medium- and long-term government bonds that were issued at the ultra-low borrowing rates experienced over the last decade or so.

However, in practice not all government borrowing is at fixed rates, with many governments (including the UK) issuing inflation-linked debt, adding to their interest costs as inflation has surged. In addition, some government debt is short term or pays a variable rate of interest, while quantitative easing has seen central banks swap a substantial proportion of fixed-rate government bonds into variable-rate central bank deposits, increasing governments’ exposure to changes in short-term interest rates.

Either way, the rapid rise in the interest rates payable on sovereign debt marks a significant shift in the fiscal calculus for most governments when combined with much higher levels of debt in most developed countries. Lots more pounds, euros, dollars and yen will need to be diverted to servicing debt, making for hard choices for finance ministers as they work out their budgets for coming years.

This chart was originally published by ICAEW.

ICAEW chart of the week: US federal financial statements

My 250th chart of the week for ICAEW takes a look at the recently published Financial Report of the United States Government for the year ended 30 September 2022 and how net liabilities have increased by 67% to $34trn over the past five years.

This week’s chart takes a dive into the latest financial statements of the United States Government for the year ended 30 September 2022 that were published on 16 February 2023, illustrating how the consolidated balance sheet of the executive, legislative and judicial branches has changed over the last five years.

The federal government reported net liabilities of $20.4trn at 30 September 2017, comprising $3.5trn in assets ($1.9trn non-financial and $1.6trn financial) less $23.9trn in liabilities ($14.7trn debt and interest, $7.7trn employee and veteran benefits and $1.5trn other liabilities). 

By 30 September 2022, net liabilities had increased by 67%, from $13.6trn to $34.0trn, comprising $5.0trn in assets ($2.3trn non-financial and $2.7trn financial) less $39.0trn in liabilities ($24.3trn debt and interest, $12.8trn employee and veteran benefits and $1.9trn other liabilities).

The increase in net liabilities is a consequence of net accounting losses of $1.2trn, $1.4trn, $3.8trn, $3.1trn and $4.2trn for the five financial years up to 30 September 2022. These amounts are calculated in accordance with US generally accepted accounting principles (US GAAP) as adapted for government by Federal Financial Accounting Standards (FFAS) issued by the Federal Accounting Standards Advisory Board (FASAB). They differ from cash budget deficits (outlays less receipts) of $0.8trn, $1.0trn, $3.1trn, $2.8trn and $1.4trn over the same period.

Revenue in the year ended 30 September 2022 of $4.9trn comprised $4.0trn from individual income taxes and tax withholdings, $0.4trn in corporate income taxes and $0.5trn in other taxes and receipts. The net cost of government operations amounted to $9.1trn, comprising $7.4trn in gross costs less $0.5trn in fees and charges plus $2.2trn from changes in assumptions. The latter primarily relate to employee and veteran benefit obligations that are on the balance sheet in the US GAAP numbers.

The scale of the negative balance sheet and continued deficit financing highlight just how dependent the US federal government is on its ability to borrow money as needed to meet its financial obligations as they fall due, and why the current challenge in raising its self-imposed debt ceiling is starting to concern markets.

This is the 250th ICAEW chart of the week, a milestone that has crept up on us as we seek to share insights into the economy and public finances that we hope are of interest to ICAEW members and all our other readers. Many thanks for your continued interest and we look forward to providing you with many more nuggets in the future.

This article was originally published by ICAEW.

ICAEW chart of the week: Slowing inflation

My chart this week illustrates the slowing rate of inflation and how it should fall further once a big surge in prices between February and April 2022 falls out of the year-on-year comparison.

Step chart showing quarterly (annualised) and annual rates of consumer price inflation (CPI):

Quarters to Apr 21, Jul 21, Oct 21 and Jan 22: +4.3%, +4.4%, +8.7%, +4.5% respectively adding up to equal +5.5% for the year to Jan 22.

Quarters to Apr 22, Jul 22, Oct 22 and Jan 23: +19.1%, +8.6%, +12.5%, +0.8% respectively adding up to equal +10.1% for the year to Jan 23.

Final column shows CPI Index increasing from 109.0 for Jan 21 to 114.9 for Jan 22 and then 126.4 for Jan 23.

The Office for National Statistics (ONS) reported that the annual rate of consumer price inflation (CPI) was 10.1% in January 2023, falling from 10.5% last month and down from a peak of 11.1% in October 2022, but much higher than the 5.5% annual rate of inflation for the year to January 2022.

Our chart breaks down annual inflation over the past two years to January 2023 into quarters, highlighting how inflation is likely to fall quite rapidly over the next three months as the big surge in prices following Russia’s invasion of Ukraine last year falls out of the year-on-year comparison.

Reported inflation this time last year was 5.5% for the year to January 2022. This can be broken down into quarterly rises (annualised) of 4.3% in the three months to April 2021, 4.4% in the quarter to July 2021, 8.7% in the quarter to October 2021 and 4.5% in the three months to January 2022. Inflation in that period was well above the Bank of England’s target range of 1% to 3%, as supply constraints drove prices higher as the domestic and global economies started to recover from the depths of the pandemic.

Reported inflation for the year to January 2023 of 10.1% can be broken down into quarterly rises (annualised) of 19.1% in the quarter to April 2022, 8.6% in the quarter to July 2022, 12.5% in the quarter to October 2022 and 0.8% in the three months to January 2023. The sharp jump in prices in the period from February to April 2022 was driven by a rapid rise in energy prices following Russia’s invasion of Ukraine that added to existing inflationary pressures, turbo charging the rate of inflation. Since then, prices across the economy have risen rapidly, although with wholesale energy prices retreating from their peak recently, the overall rate of price rises has slowed down significantly in the last quarter.

The chart also shows how the consumer price inflation index (the CPI Index) increased from 109.0 in January 2021 to 114.9 in January 2022 and to 126.4 in January 2023.

The chart doesn’t show the intermediate annual rates of inflation, although these can be calculated using the geometric average of the preceding four quarters. The annual rate increased from 5.5% in January 2022 to 9.0% in April 2022, then to 10.1% in July 2022 before reaching a peak of 11.1% in October 2022, following which it fell to 10.1% in January 2022. 

Successively dropping quarters from the previous year out of the year-on-year comparison and replacing them with price rises over the most recent quarter saw inflation rise as quarterly rises (annualised) of 4.3% fell out to be replaced by 19.1%, 4.4% by 8.6%, and 8.7% by 12.5%, before inflation fell over the last three months as 4.5% was replaced by 0.8%.

These ‘base effects’ mean that most commentators expect a sharp slowdown in the annual inflation rate over the next nine months as monthly and quarterly price rises over that time should be much lower than the comparatives falling out of the year-on-year calculation. The biggest fall is expected over the next three months, as even with a sizeable rise in domestic energy prices expected in the month of April 2023 as government support is withdrawn, price rises are expected to be much lower than the 19.1% annualised rate seen in the quarter to April 2022.

While the medicine of higher interest rates is no doubt playing a key part in restraining prices from rising as fast as they did last year, the Bank of England knows that arithmetic should be the biggest contributor to inflation coming down over the course of 2023.

This chart was originally published by ICAEW.

ICAEW chart of the week: UK business births and deaths

My chart this week illustrates the choppy economic waters facing UK businesses as more stopped trading than were created over the course of 2022.

Bar chart going down vertically from Q1 2017 to Q4 2022 showing business closures and creations on the left and the net decrease or net increase on the right.

Q1 2017 -78,950, +97,340, +18,390
Q2 2017 -96,390, +80,930, -15,460
Q3 2017 -82,555, +86,380, +3,825
Q4 2017 -67,655, -73,975, +6,320
Q1 2018 -86,775, +88,295, +1,520
Q2 2018 -80,550, +95,715, +15,165
Q3 2018 -65,660, +79,410, +13,750
Q4 2018 -72,375, +76,730, +4,355
Q1 2019 -77,990, +97,110, +19,120
Q2 2019 -91,410, +95,675, +4,265
Q3 2019 -74,440, +84,970, +10,530
Q4 2019 -67,990, +77,970, +9,980
Q1 2020 -96,660, +89,910, -6,750
Q2 2020 -72,665, +73,415, +16,170
Q3 2020 -60,415, +76,585, +16,170
Q4 2020 -78,965, +82,080, +3,115
Q1 2021 -86,600, +101,845, +15,245
Q2 2021 -88,515, +91,400, +2,885
Q3 2021 -83,235, +81,165, -2,070
Q4 2021 -87,040, +79,870, -7,170
Q1 2022 -110,515, +98,730, -11,785
Q2 2022 95,155, +89,225, -5,930
Q3 2022 -79,305, +67,390, -11,915
Q4 2022 -82,390, -69,445, -12,945

The Office for National Statistics (ONS) published its latest quarterly experimental statistics on business births and deaths on 2 February 2023. This reports that business closures have increased since before the pandemic at the same time as business creations have fallen, resulting in net reductions in the number of VAT- or PAYE-registered businesses operating in the UK over the past six quarters.

The statistics are taken from the government’s Inter-Departmental Business Register, a database of approximately 2.8m businesses registered for either PAYE or VAT, just over half of the estimated 5.5m businesses operating in the UK (according to the Department of Business & Trade). The difference principally relates to sole traders with turnover below the VAT threshold who have not voluntarily registered for VAT, or for PAYE if they trade through a company. There is also a time lag on reporting the closure of businesses where a business continues to be registered, with the ONS waiting for several periods of zero VAT or zero payrolls before recording a business as closed.

The statistics are labelled as experimental because they are not as rigorous as annual statistics, but the advantage is that they provide data on business births and deaths in 2022, for which we will not get a full set of annual numbers until towards the end of this year. 

As our chart illustrates, the quarterly net change in businesses in 2017 was +18,390, -15,460, +3,825 and +6,320 respectively, followed by +1,520, +15,165, +13,750, +4,365 in 2018, +19,120 and +4,265, +10,530 and +9,980 in 2019. The pandemic saw a fall in business closures as government support enabled businesses that would otherwise have stopped operating to stay alive, with a net decrease of -6,750 in Q1 2020 followed by net increases of +750, +16,170, +3,115 in the second, third and fourth quarters of 2020. 

A spurt in business creations in early 2021 saw net increases of +15,245 and +2,885 in the first two quarters, before net decreases of -2,070 and 7,170 in the last two quarters of 2021. With pandemic support measures coming to an end and the onset of the energy crisis, the trend moved further into negative territory with quarterly net closures of -11,785, -5,930, -11,915 and -12,945 in 2022.

Quarterly business deaths averaged around 81,400 in 2017, 76,300 in 2018, 78,000 in 2019, 77,200 in 2020, 86,300 in 2021 and 91,800 in 2022, while quarterly business births averaged around 84,700 in 2017, 85,000 in 2018, 88,900 in 2019, 80,500 in 2020, 88,600 in 2021 and 81,200 in 2022.

These numbers will not be pretty reading for Kemi Badenoch, the new Secretary of State for Business and Trade. With interest rates on the rise, energy costs still at very high levels and consumers cutting back on spending, the risks are that many more existing businesses will cease trading, while business creations may continue to be subdued.

One crumb of comfort is that businesses founded during downturns are believed to do better than those founded in good times. So, if you are thinking of striking out on your own with a new business idea, there may be no better time than now.

This chart was originally published by ICAEW.

ICAEW chart of the week: IMF economic projections

Our chart this week is on the global economy and how the UK is at the bottom of the IMF’s league table for economic growth in 2023 and 2024.

Chart showing the annualised rate of real GDP growth projected for 30 countries by the IMF for 2023 and 2024, together with global averages. Different colours are used to classify countries between (i) emerging markets and developing economies (ii) global averages (iii) advanced economies excluding UK and (iv) UK.

Starts with India at the top at +6.4% and ends with the UK at at the bottom with growth of 0.1%.

Details are in the text below.

The IMF reported in its World Economic Outlook Update published on 30 January 2023 that it expects global economic output to increase by an average of 3.0% or 2.4% over the course of 2023 and 2024, depending on whether you weight the relative sizes of each economy using purchasing power parity (PPP) or market exchange rates.

While headlines have focused on the more immediate prospects for economies around the world in 2023 and an expected recession in the UK, our chart takes a look at projected economic growth for both 2023 and 2024 for the 30 countries tracked by the IMF.

The UK is at the bottom of this table, with a projected economic contraction of 0.6% in 2023 combined with projected growth of 0.9% in 2024 being equivalent to annualised economic growth after taking account of inflation of 0.1% over two years.

This does not compare well with projected real economic growth in the other G7 nations: Germany 0.7% (0.1% in 2023 and 1.4% in 2024), Italy 0.7% (0.6% and 0.9%), France 1.1% (0.7% and 1.6%), the USA 1.2% (1.4% and 1.0%), Japan of 1.3% (1.8% and 0.9%) and Canada 1.5% (1.5% and 1.5%). It is also below other advanced economies such as the Netherlands 0.9% (0.6% and 1.2%), Australia 1.6% (1.6% and 1.7%), Spain 1.7% (1.1% and 2.4%), and South Korea 2.1% (1.7% and 2.6%).

Average growth in emerging market and developing countries of 4.1% over the two years is much higher than the annualised average of 1.3% in advanced economies. India is expected to grow by 6.4% (6.1% in 2023 and 6.8% in 2024), Philippines 5.5% (5.0% and 6.0%), Indonesia 4.9% (4.8% and 5.1%), China 4.8% (5.2% and 4.5%), Malaysia 4.6% (4.4% and 4.9%), Egypt 4.6% (4.0% and 5.3%), Kazakhstan 4.3% (4.3% and 4.4%), Thailand 3.6% (3.7% and 3.6%), Pakistan 3.2% (2.0% and 4.4%), Nigeria 3.0% (3.2% and 2.9%), Türkiye 3.0% (3.0% and 3.0%), Saudi Arabia 3.0% (2.6% and 3.4%), Argentina 2.0% (2.0% and 2.0%), Iran 2.0% (2.0% and 2.0%), Mexico 1.6% (1.7% and 1.6%), Brazil 1.3% (1.2% and 1.5%), Poland 1.3% (0.3% and 2.4%), South Africa 1.2% (1.2% and 1.3%) and Russia 1.2% (0.3% and 2.1%).

Economic performance is not solely about these percentages, which while adjusting for inflation do not reflect the starting point nor changes in population. Advanced economies are much wealthier and smaller levels of growth represents much bigger increments than higher rates of growth in much poorer countries. Japan’s growth is despite a shrinking population, unlike the UK where the population is still expanding.

A devaluing currency can also mean that some countries can end up poorer at the end of the year despite positive headline growth rates. An example is Türkiye, where annualised average growth of 4.5% over the five years to 2022 was accompanied by a 98.9% fall in the value of the Turkish Lire against the Euro.

One crumb of comfort for the UK is that the IMF’s projections (not forecasts) are of course not what is going to happen. They are based on the IMF’s assessment of both official and unofficial forecasts and projections together with a range of assumptions from global energy prices to business investment, from fiscal policy to the behaviour of consumers, from the effects of climate change to the impact of wars. All of these could easily end up being very different, even if economic forecasting was an exact science, which it isn’t.

Policymakers in the UK will definitely be hoping that the British economy performs much better than these dismal projections suggest. After all, if you are at the bottom of a league, the only direction to aim for is up.

This chart was originally published by ICAEW.

ICAEW chart of the week: Australia federal deficit

Our chart heads down under this week to take a look at how the reported financial position of Australia’s federal government has changed over the last decade.

Australia Day on 26 January provides an opportunity to take a look at the federal balance sheet for Australia. This is included in the audited consolidated financial statements of the Commonwealth of Australia that are prepared in accordance with Australian Accounting Standards, which generally align with International Financial Reporting Standards (IFRS), although AASB 1049 Whole of Government and General Government Sector Financial Reporting diverges from IFRS in some aspects. They encompass the federal level of government in Australia, excluding states, territories and local authorities.

Our chart shows how the balance sheet has grown over the last 10 years, from net liabilities of A$256bn at 30 June 2012 (£147bn at the current exchange rate of A$1.77:£1.00) to A$607bn at 30 June 2022 (£348bn).

At 30 June 2012, the balance sheet comprised non-financial assets of A$123bn and financial assets of A$268bn, less interest-bearing liabilities of A$288bn, and provisions and payables of A$359bn to give a negative net worth of $256bn. These balances had grown to non-financial assets of A$266bn and financial assets of A$788bn at 30 June 2022, less interest bearing liabilities of A$1,109bn, and provisions and payables of A$552bn. 

Non-financial asset balances grew over the 10 years from 2012 to 2022 with land and buildings increasing from A$35bn to A$66bn, military equipment A$40bn to A$81bn, other plant, equipment and infrastructure $19bn to A$72bn, intangibles A$7bn to A$15bn, heritage and cultural assets A$10bn to A$13bn, and other from A$12bn to A$19bn.

Financial assets also grew, with investments and loan balances increasing from A$197bn to A$640bn, advances from A$27bn to A$70bn, receivables and accrued revenue from A$39bn to A$69bn, and cash from A$5bn to A$9bn. A substantial proportion of this growth relates to the Australia Future Fund, a sovereign wealth fund that was established in 2006 primarily to cover the costs of paying for unfunded pension obligations, together with a series of smaller funds intended to support infrastructure investment, disability insurance, medical research, indigenous communities and natural disasters.

Interest-bearing liabilities increased significantly as a consequence of the pandemic, with government securities increasing from A$268bn to A$577bn over the 10 years to June 2022, central bank and other deposits from A$3bn to A$426bn, and loans, leases and other interest bearing liabilities from A$17bn to A$106bn.

Provisions and payables grew by a lesser extent, with superannuation and other employee liabilities increasing from A$252bn to A$359bn, Australian currency on issue from A$54bn to A$102bn, payables from A$23bn to A$27bn, and provisions from A$30bn to A$64bn.

While negative net worth has increased from 17% of GDP to 24% of GDP over the 10 years, principally as a consequence of the pandemic in the last couple of years, the establishment of the Australia Future Fund, the move of federal employees from defined benefit to defined contribution pension arrangements, and active management of the balance sheet means that Australia is in a much healthier fiscal position than many other developed countries. 

For the Australian Department of the Treasury at least, this should make for a happy Australia Day.

This chart was originally published by ICAEW.